The new kids on the block

By Rebecca Goozee

It is no surprise that consumer trust in UK banks is continuing to shrink following the chaos of the global financial crisis. The Northern Rock collapse, followed by the credit crunch and then the Supreme Court’s bank charge ruling have all left a nasty taste in the public’s mouth as trust rates continue to erode. Indeed, banks are going to have to try harder if they want to appease the British public, with less than one in three people trusting their bank according to a Which? report.

Enter a new generation of banks looking to revitalise the UK high street. Metro Bank - perhaps the most well known of this new era of banks - became the first new high street bank to open in Britain for more than a century when it began trading in July. The bank's founder, Vernon Hill, who also founded US bank Commerce Bancorp, promises to set it apart from the old British banking model as truly customer-focused and offering a "new, convenient way of banking".

And Metro Bank isn't the only start-up to hit Britain's high street over the last 12 months, with Tesco Bank, Virgin Bank, Walton & Co and Home & Savings Bank all joining in. But, despite the customer toilets, dog biscuits and household name backing offered by the new banks, can they mount a serious challenge to the dominance of the Big Four?

Anthony Thomson, Chairman of Metro Bank, definitely thinks there's potential, particularly when it comes down to customer service. When I sit down with him in September, Thomson is pleased with the progress of the brand new business so far. "We know from our experience in the last six or eight weeks that branch banking is very important to people. And we equally know from experience that people want to be able to bank at various times of the day, whether that's before work or at the weekends.

"One of the key differences is we want to give people a better experience. Part of that is value, which comprises of several elements: service, convenience and clear, transparent products. This is what represents value to people." Thomson goes on to explain that Metro Bank can do things that other banks can't. "Customers don't need to make appointments, we can open accounts within 15 minutes and we can print permanent chip and pin debit cards within that time frame too."

As well as super quick account opening and almost instant debit cards, Metro promises that stores (the bank doesn't appear to like using the word 'branch', which may be something to do with the customer service side of things) will be open every day, including Sundays, apart from four public holidays a year. Stores will have customer toilets and will allow dogs, providing them with a bowl of water and a bone.

The bank will also have free coin counting machines in its branches, which can be used by both customers and people who do not have products with it, as well as safe deposit boxes that can be rented out for €118 a year. Metro also plans to offer personalised business banking services, giving local managers the freedom to make decisions on loans for local companies.

Challenges

But it isn't all extended hours and doggy treats at Metro Bank. Thomson explains that he saw four key challenges when they opened the bank. The first was a concern around how the bank would be seen by regulators. "The answer to this, thankfully, was that the regulators were very keen to see more competition and consumer choice on the high street," says Thomson.

Second on the list was the location of the branches. Thomson explains that choosing the right locations to fit the model was vital. He means corner buildings with high visibility and high footfall, with high ceilings and lots of glass to emphasise the feeling of space. "This was and continues to be a tough challenge," he explains, "because we can find these sites, but we're looking at occupying 200-250 of these sites inside the M25 within the next decade."

The third challenge for Thomson is all about IT. He says that Metro Bank was looking to develop a state-of-the-art core banking engine, paid for on a per transaction per month basis in order to spread IT platform costs. "We're kind of unique in the sense that we have a system that we didn't have to build from scratch and that is almost pay-as-you-go."

The fourth challenge on Thomson's list - perhaps the most difficult and certainly the most long-term - is persuading people to change from their existing bank to Metro. "This, of course, we didn't know the answer to until we opened the door," he explains. But according to Thomson early indications have exceeded expectations, although he remains cagey over the precise joining figures.

With the top five banking groups having over an 80 percent share of the crucial current account market, these new-style banks are going to have to try mighty hard to persuade customers away from their traditional competitors. And with Liz Hartley, Principal Consultant for Datamonitor's Financial Services Team, predicting Metro Bank winning a 0.5 percent market share in the sector by 2015, it's not looking overly positive.

That said, Hartley has previously admitted that, "The new entrants will bring a more dynamic aspect to financial services, using tools learned in the supermarket and fast food sectors to generate real consumer engagement to drive business growth."

Datamonitor's Daoud Fakhri is also sceptical about how new players, like Metro Bank, will impact the market, claiming it to be somewhat "limited". He says that the likes of Lloyds or RBS aren't going to be unduly worried about the new arrivals. "The biggest problem they face, that will prevent them from taking huge amounts of market share, is simply customer inertia - people in this country just seem quite resistant to moving from bank to bank.

"Obviously, the new banks don't come with any of the baggage of what's happened and that's a big mark in their favour," adds Fakhri. Indeed, with no negative perceptions, they haven't had to deal with any of the backlash over bank charges or poor service, so effectively that means starting with a blank slate. "This is a good starting point for these new players, because if they can make a big play on service, and I know Metro Bank in particular are really focusing on their customer service proposition, then that's where they could have a competitive advantage over the banking establishment," continues Fakhri.

"This will work in their favour, but as to whether or not it's going to be enough to attract new customers, well, I'm doubtful at best." And if you look back a decade into the history of the financial services industry in the UK you can see why Fakhri is somewhat pessimistic: there were a spate of new entrants then like Coot, Intelligent Finance, Egg and so on, all coming up with innovative ways of dealing with their customers and focusing on the internet channel.

There was a lot of expectation that these new start ups were going to shake up the market but, unfortunately, they all failed to do so. Egg was sold off, Intelligent Finance is looking like it's also going to be sold off and Coot is gradually being wound down by Santander. However, on the upside, 2010's entrants to the market are all focusing on face-to-face in-branch proposition, which will set them apart from their predecessors. Fakhri believes that banks have finally recognised that it was wrong to neglect the branch networks, which they did throughout most of the 1990s and early part of this decade.

"They've finally woken up to the fact that branches are actually the most effective channel for building customer loyalty and acquiring new customers. And this is where Metro could potentially have an advantage over the likes of those internet-only providers. Likewise, Tesco Bank also has a ready-made branch network set up, so that could work," says Fakhri.

In fact, in a report released earlier this year, Datamonitor predict that Tesco Bank will secure more market share then Metro Bank over the next three years, with 1.5 percent of the current account market, leaving Metro Bank languishing at 0.5 percent. Fakhri believes this is down to the stronger brand image. Tesco are a familiar player on the high street and they have achieved quite a lot of success in the financial services arena so far.

"If you look at their credit cards for example, they account for about one in 10 of all credit card transactions, which is actually quite good. They've also been good at linking together their financial products with their club card scheme, so for example, you can get Clubcard points on your credit card transactions and so on. They've got great presence in the market and a ready-made branch network combined with the fact they are well regarded by their customers and that credibility, track record and presence is going in their favour."

Indeed, the strong brand image, ubiquitous presence and a proven track record of success in financial services, leveraging a loyalty scheme and its second-to-none data mining means that Tesco Bank is best placed to see success. Will Tesco do for banking what it has done for the grocery sector? Only time will tell on this one.

But, besides attracting customers, Fakhri believes that the time it will take to build up assets will also stand in the way for all these new players. The wholesale markets, for example, are obviously quite lacklustre compared to 2007 and as such it will be difficult to lend in any great number, in any great quantities. As such, it will remain difficult to compete with Lloyds or Santander, for example, simply because they won't have sufficient retail deposits to finance that lending.

At the moment, says Fakrhi, Metro Bank's products appear to be fairly uncompetitive on price. "It's instant access savings account, for example, is only offering 0.5 percent. Virgin Bank has also said that it is likely to charge a monthly fee for its current account when that launches. The new entrants are majoring on service rather than price, and this may limit their appeal to that large segment of price-conscious consumers. Whether longer opening hours are enough to tempt significant numbers of consumers to switch is, I think, debatable."

Official red tape is also hindering new banks from challenging the traditional banking giants, according to an official review by the Office of Fair Trading (OFT). The OFT has found that potential market entrants are unable to grow their customer bases because of the difficulties in obtaining accurate credit information. These barriers are weakening the competitive edge and reducing consumers options, says the OFT.

With complaints against banks reaching a whopping 7143 per day, according to the Financial Services Authority (FSA), the OFT findings are particularly worrying as experts fear that high street banks won't be punished if customers have few alternatives.

Clive Maxwell of the OFT has said in relation to these findings that vigorous competition is critical for personal and small business customers, helping to support growth and productivity in the economy. "If firms face significant difficulties in entering and competing in the market, incumbents have less incentive to reduce costs, innovate and price competitively."

It appears that with attention to customer service and price options there are many opportunities for these new players to succeed on the UK's high street. While it is doubtful that they'll be serious contenders for the traditional banks any time soon, waiting in the wings for more inevitable slip ups in the financial services industry could pay off in the long term. Either way, it looks like a waiting game for these alternative banks.  

And if the big boys on the high street do get worried about the new entrants on the market, Fakhri advises three main measures to ensure they combat any immediate or future threat. First, reward customer loyalty, second position themselves so they know that the customer wants and how to deliver, and third, convince customer that they are on their side.

"Traditional banks can learn much from the success of retailers," says Fakhri. "We believe that they should not rely on inertia to ensure they continue to dominate. Retailers have powerful tools on their side, such as a head start in knowing what consumers want due to loyalty schemes and data mining. This detailed knowledge about consumer preferences, combined with the market becoming more fluid due to the sale of Northern Rock and sell off of parts of RBS and Lloyds Banking Group could pose a significant threat in this decade." 

There's no doubt that customer service has a role to play in the bank of the future, so if these new banks want to position themselves in the best possible place, they need to use this to their advantage. As Metro Bank's Thomson explains, "Our model is focused on giving people a better customer experience and so far so good," which looks like a pretty good place to start from to me.

Customer care?

Earlier this year the Financial Services Authority (FSA) criticised the UK's biggest high street banks for the poor way they deal with customer complaints. Five of the unnamed banks have since agreed to make big improvements and two are being investigated further and may suffer large fines. The FSA blamed a lack of interest by senior bank management, bonus schemes that inhibited staff from paying compensation and poor decision-making.

The FSA demanded changes after investigating the way the banks had handled 600 sample complaints. These complaints were mainly related to day-to-day banking problems as opposed to the miss-selling of payment protection insurance or overdraft charges, which have been dealt separately by the FSA.

The banking industry receives about three million complaints a year. Last year, the Financial Ombudsman Service (FOS) reported that many of the cases it dealt with, banks appeared to be deliberately fobbing off their customers in the hope they would go away. It said that customers were dealt with "dismally" and eventually favoured more than half the customers complaints that it dealt with.

The FSA would not reveal the individual banks that it examined, but did point out that these five banks were responsible for 70 percent of the complaints that firms receive and that more than 60 percent of the unresolved complaints ended up with the FOS.

When the ombudsman's office started naming and shaming the most complained about banks in the second half of 2009, the main culprits were Lloyds Banking Group, Barclays, RBS-NatWest, Abbey (now Santander) and HSBC. HSBC has since said that it is not one of the five being forced to change its ways by the FSA.

Eric Leenders of the British Bankers' Association (BBA) told the BBC that the industry needed to improve: "Clearly more needs to be done - that is why the BBA is working with the industry to bring all banks up to the standards of the best. This is what both FOS and the banks have started to publish detailed complaint information."

Source: bbc.co.uk

The FSA also found in its survey that:

• Thirty-six percent of complaints it examined had been investigated poorly or inadequately, especially by staff in branches or call centres
• Eighteen percent of decisions had been wrong and unfair to the customer
• Where compensation was offered, it was often not enough
• Correspondence was inadequate, with banks failing to tell the customers the outcome of their investigation in a way that was "fair, clear and not misleading"
• Three out of the five banks misused their "two-stage" complaints procedure, delaying the resolution of the complaints
• Four out of the five banks were too slow at dealing with complaints
• Three of the five banks failed to tell customers they could go to the FOS if they were still unhappy with their bank's reply

How the new banks stack up

Virgin Money: Virgin Money made its move into regional retail banking with a €14.8 million offer for a small private bank, the Church House Trust, in January this year, and short-cut the process required for getting a license to run a bank. The existing Virgin Money already consists of savings and investment products, while high street branches with current account and mortgages are due to be up and running by the end of the year. Virgin says that the bank will be run according to the company's lines of simplicity and value for money.

Walton & Co: Walton & Co is the baby of a British city analyst with backing from Blackstone, a private equity group. It is aimed at wealthy individuals or small businesses and will also work on an old-fashioned personal-contact approach. The first two branches will open next year.

Tesco Bank: In August 2009, Tesco announced that it was building a bank 'from scratch', and it has already acquired a 50 percent stake RBS had in its personal finance division. Subject to regulatory approval, new savings products and mortgages will be launched at the end of 2010/11, with current accounts to follow in the second half of 2011, to take the company to a full-service retail bank.

Metro Bank: On March 5, 2010, the Financial Services Authority (FSA) granted Metro Bank the first full service banking licence to be granted for a new high street bank in more than 100 years. Co-founded by Anthony Thomson and Vernon Hill, Metro Bank opened its first store in Holborn on July 29, followed shortly by a second store in Earl's Court. The bank promises to be open early and late, seven days a week, as well as offering "great online banking, 'instant' bank cards, and access to local advisers by phone 24/7.

Home & Savings Bank: According to numerous reports earlier this year, US private equity giant Blackstone had raised more than €295 million from investors to launch a new high street bank called Home & Savings Bank. Stuart Sinclair, former head of Tesco Personal Finance and director of RBS's retail banking operations, was said to be among the senior executives recruited to run the new bank, which has yet to be granted a licence by the FSA.

Aldenmore: Essentially the reincarnation of private bank Ruffler after it was sold to private equity group Anacap Financial Partners last year combined with Base Commercial Mortgages, Aldenmore was launched in July 2009. According to Moneyfacts, by combining these two businesses Aldermore has the expertise and financial backing to develop into a significant force within the UK savings and business finance markets.